The Aulnay plant near Paris, which employs more than 3,000 workers to build the Citroen C3 subcompact, will end production in 2014 as Peugeot reorganizes its under-used domestic capacity, the company said on Thursday.
Aulnay will become the first French car plant to close in two decades, challenging new Socialist President Francois Hollande's pledge to revive domestic industrial production.
"I know how serious these measures are for the people concerned, and for our entire company," Chief Executive Philippe Varin told reporters.
"But a company can't preserve jobs when it's burning 200 million euros (US$245 million) a month in cash," he said. "Prevaricating would have put the group in great danger."
While General Motors Co and Chrysler emerged lean and profitable from the global economic crisis after closing some plants as a condition for U.S. bailouts, European governments have made the opposite demand.
Their insistence that automakers avoid closures in exchange for loans and subsidies has led to a six million-vehicle gap between the region's output and production capacity.
Hollande's office said the president was "extremely concerned" over Peugeot's decision and that ministers had been asked to do everything possible to limit the social fallout.
But the government stopped short of an outright condemnation of the cuts, drawing the wrath of the CGT, France's biggest industrial union.
In an interview with television channel TF1, Varin said the company would not seek aid from the French government. He said Peugeot needed to ensure the future of its plants, not to inject more cash into its business.
"I am convinced that the plan we are going to put in place is vital for the future of the group, and I am determined to see it through," Varin said, adding that he has the support of the Peugeot family, the company's key shareholder.
Peugeot said another plant in the western city of Rennes would let go of 1,400 workers as it shrinks in step with demand for larger cars such as the Peugeot 508 and Citroen C5.
Some 3,600 non-assembly jobs will also be scrapped across the country.
Combined with France's share of 6,000 European job cuts announced last year, the latest measures will reduce Peugeot's 100,000-strong domestic workforce by close to 10 percent, excluding subcontractors and service providers.
Workers at Aulnay downed tools after the announcement, halting production. Hundreds gathered under protest banners at the main entrance to the plant, the biggest industrial employer in the depressed, multiethnic Seine-Saint Denis district northeast of Paris.
"Varin has declared war on us, and we'll give him war," said local CGT union leader Jean-Pierre Mercier.
Shares in Peugeot closed down 1.7 percent. The stock is at its lowest in more than a quarter of a century. It has plunged 32 percent so far this year, wiping 1.2 billion euros off the company's market value.
GM, based in Detroit, bought a 7 percent Peugeot stake in March to underpin the companies' planned alliance in purchasing, logistics, vehicle development and production.
Seeking to disarm critics, Varin disclosed that a 700 million euro loss at the core manufacturing division had dragged the group into the red in the first half. Operating cash flow is not expected to turn positive before 2015, he said.
"LOST THE PLOT"
"People weren't expecting them to consume cash at such an alarming rate for such a long time," said Erich Hauser, a London-based auto analyst with Credit Suisse.
"This is a company that has run out of options," Hauser said. "Peugeot has lost the plot in European small cars, which were its traditional mainstay."
Peugeot's global sales fell 13 percent to 1.62 million light vehicles in the first six months, contrasting with a more modest 3.3 percent decline reported by Renault and a 10 percent gain for the Volkswagen brand.
Among automakers most exposed to southern European markets hit by the region's debt crisis, Peugeot lacks its German rival's export success, and it does not have the support of a low-cost brand like Renault's Dacia.
Still, the French automaker's plans could prompt restructuring actions by competitors, analysts said, as the European industry battles overcapacity estimated at 20 percent.
Renault and Fiat are already reducing headcount, while GM's Opel division plans to close its Bochum plant in Germany by 2017.
"We would expect Fiat's CEO (Sergio) Marchionne to be watching today's announcement very closely," said Kristina Church of Barclays Capital.
Marchionne said last week that Fiat would be left with "one plant too many" in Italy if the auto market did not recover within 2 to 3 years, while predicting that it probably would.
His opposite number at Renault, Carlos Ghosn, has said the first major restructuring by a European manufacturer could open the floodgates to a rash of closures.
"The day somebody's able to restructure heavily in Europe, it's going to force all car makers to do it," Ghosn said in March.
Opel CEO Karl-Friedrich Stracke, the fourth chief executive in less than three years, stepped down unexpectedly on Thursday in a sign of further turbulence at the U.S. automaker's ailing European business. GM said Stracke would take on "special assignments" for the U.S. parent's CEO and GM Vice Chairman Steve Girsky would serve as acting head of GM Europe.
Peugeot executives had already outlined plans to close Aulnay in a document leaked to unions in June 2011, while warning that an announcement would be impossible before French elections, which ended last month.
The company pledged on Thursday to convert the site for other industrial activities and transfer half its workforce to its other Paris plant in Poissy, west of the capital.
The government, which is due to unveil a support plan for the wider auto sector on July 25, also promised to ensure that Peugeot helps laid-off Aulnay workers find new jobs.
But national CGT union leader Bernard Thibault slammed the new administration for failing to prevent the Peugeot job cuts and called the restructuring plan an "earthquake".
The job losses at Peugeot may yet go further.
Some 2,700 workers at the Sevelnord delivery truck plant in northern France were asked in May to agree to a pay freeze, hundreds of job cuts and increased flexibility or face closure after Fiat exits the joint venture as soon as this year.
Discussions with unions and prospective partners are "on the right track," Peugeot manufacturing chief Denis Martin said on Thursday. Future production now hangs on conditions including "the efforts that we're asking of the workforce", he said.
(Additional reporting by Nicholas Vinocur, Gerard Bon, Elena Berton and Gilles Guillaume in Paris and Jennifer Clark in Milan; Editing by James Regan and Paul Taylor)